Wednesday, March 21, 2012

SKPRES ... Mar12

TA Securities Research ...

We are initiating coverage on SKP Resources Berhad (SKPRB) with a BUY rating and target price of RM0.67. This implies a total potential upside of 28% from current price levels. We like the group due to its good business model, strong balance sheet, solid sales and earnings growth, positive free cash flow, attractive valuations and a rising dividend payment.

One Stop Service Centre In The Making SKPRB is principally involved in the manufacturing of
plastic parts and components, contract manufacturing, precision mould making, the sub-assembly of electronic
and electrical equipment and other secondary processes. It provides a wide range services to its customers with specialty in audio, visual, office automation, personal computers products amongst others. Through the years, the group has also diversified into downstream services by providing assembly facilities as part of its “one stop service centre” concept.

Strong Balance Sheet - Potential to Increase Dividend Payout
SKPRB has a strong balance sheet backed by net cash of RM57mn as at end of December 2011. We opine that the strong balance sheet can adequately steer the future direction of earnings. Looking to 2012, we expect the group to generate double-digit earnings growth and positive operating cash flow while further investing in the long-term growth of the group. The group now has a dividend payout policy of 50% of profit after tax (PAT).

There is potential for the group to increase its dividend payout policy given its solid financial capabilities. We
expect the group to pay 3.0sen DPS in FY12 while in FY13; it should improve to 3.5sen/share. This translates into attractive dividend yield of 5.5% and 6.4%, respectively.

Expect Growth To Remain Strong
We expect SKPRB to continue seeing good growth momentum. We expect the group’s revenue to grow at
a compounded annual growth rate (CAGR) of 20% between FY08-FY13 while net profit should increase at a CAGR of 116.5%. We expect SKPRB’s revenue to reach RM407.7mn and RM443.0mn in FY12 and FY13 while net profit is forecasted to increase to RM35.3mn and RM39.3mn in FY12 and FY13, respectively. The commendable growth is attributed to more value added services for the electrical and
electronics industry and higher utilisation rate.

Benefit From Outsourcing Trend And Dyson’s Expansion
The outsourcing trend by MNCs creates opportunities for players such as SKPRB to be their suppliers. Since
SKPRB has met strict quality requirement, on-time delivery and manufacturing costs, we believe it will be easier for the group to secure more orders from MNCs. We know that the complete assembled production of Dyson on certain models of upright vacuum cleaners was outsourced to SKPRB. Dyson is the world’s leading company in vacuum cleaner industry with 23% share of the global vacuum cleaners market. We understand that the group is currently undergoing the prequalification process with Dyson for some of its new products. Thus, we expect more substantial orders from Dyson in the future and leverage on its expansion.

On the valuation front, at RM0.545, SKPRB is trading at PER of 9.3 in FY12 and 8.3x FY13. We
initiate coverage on the stock with a target price of RM0.67, using a CY12 EPS of 6.4sen and pegging it to
the industry weighted average of 10.4x. We benchmark SKPRB to Meiban Group, VS Industry, Haitian International and Chen Hsong Holdings.

SKP Resources Berhad (SKPRB) is well-known within the plastic industry for its reputation as a “One-Stop Service Centre”. The group was established by experienced leaders from the plastic industry and has reached the world class standard and quality in its field. Due to its expertise, the group manages to attract established global companies to become its customers.

SKPRB is principally involved in the manufacturing of plastic parts and components, contract manufacturing,
precision mould making, the sub-assembly of electronic and electrical equipment and other secondary processes. All of the group’s products are catered for a diversified base of multinational corporations (MNCs) based in Malaysia.

The history of SKPRB traces back to 1994 when Dato’ Gan Kim Huat, founded Syarikat Sin Kwang Plastic Industries Sdn Bhd (SKP) in a joint venture with Mezzanine Capital (Malaysia) Sdn Bhd (MCM) and Delima Kristal Sdn Bhd to manufacture plastic injection products. The group is headquartered in Batu Pahat, Johor, where the group’s main manufacturing and R&D facility is located.

On 12 December 2000, it was converted to a public limited company and assumed the name Vital Conglomerate Berhad. Subsequently on 8 October 2002, it changed its name to SKP Resources Bhd (SKPRB). SKPRB was listed on the Second Market of Bursa Malaysia in 2003. Currently, nearly 73.8% of SKPRB is controlled by Gan Family. Dato’ Gan and his son, Gan Poh San are also holding executive directorships in Tecnic Group Berhad (Tecnic), a listed company on Bursa Malaysia.

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